SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OFEXCHANGE ACT OF 1934
For the quarter Commission File
ended: June 30, 1996 Number: 000-23966
BDM International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 4-1561881
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1501 BDM Way, McLean, Virginia22102-3204
(Address of principal executive office) (Zip Code)
Registrant's telephone number
including area code: 703-848-5000
Not Applicable
(Former name, former address, and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of the close of business on July 31, 1996, the registrant had outstanding
14,174,031 shares of Common Stock, par value $.01 per share.
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BDM INTERNATIONAL, INC.NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) General
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The accompanying financial statements of BDM International, Inc. and
subsidiaries (BDM or the Company) as of June 30, 1996 and for interim periods
ended June 30, 1996 and 1995, are unaudited and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. The balance
sheet data as of December 31, 1995, was derived from the Company's audited
consolidated financial statements, but does not include all disclosures required
by generally accepted accounting principles. Certain other information and
disclosures included in the Company's annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the above referenced rules and regulations. It
is suggested that these financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's latest annual report to the Securities and Exchange Commission on Form
10-K.
The accompanying consolidated financial statements reflect all
adjustments and reclassifications that, in the opinion of management, are
necessary for a fair presentation. All such adjustments and reclassifications
have been deemed to be of recurring nature, except for the write-off of goodwill
in March 1995, as discussed below.
(2) Income Taxes
------------
The Company uses the estimated annual effective rate method for interim
income tax purposes. The Company also recognizes an expense for U.S. income
taxes on undistributed earnings of its foreign subsidiaries as though the
earnings had been distributed.
The difference between the combined statutory federal and state income
tax rate of 42% and the Company's actual effective income tax rate of 43% for
the six months ended June 30, 1996, is primarily attributable to goodwill
amortization which is not deductible for federal income tax purposes. The
difference between the combined statutory federal and state income tax rate of
41% and the Company's actual effective income tax rate of 49% for the six months
ended June 30, 1995, is primarily attributable to a charge of $1.6 million
recognized in the first quarter of 1995 to reflect management's estimate of the
recoverability of unamortized goodwill generated in an earlier business
acquisition. This charge, as well as the majority of the Company's other
goodwill, is not deductible for federal income tax purposes, thus resulting in
the higher effective tax rate.
(3) Earnings Per Share
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Net income per common share is net income divided by the weighted
average number of common shares and common share equivalents outstanding during
the period. The Company's common share equivalents consist entirely of stock
options.
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BDM INTERNATIONAL, INC.NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(4) Capital stock transactions
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On March 27, 1996, the Company completed a secondary offering of common
stock to the public in which 3,220,000 shares of Common Stock were sold at
$36.50 per share. Of the total 3,220,000 shares sold, 450,000 were primary
shares and the remaining 2,770,000 shares were sold by certain of the Company's
shareholders, including 400,000 of Class B shares, which were converted to
Common Stock immediately prior to the offering. The net proceeds of $15.3
million was used for general corporate purposes and to finance future
acquisitions.
The remaining shares of stock available under the 1995 Employee Stock
Purchase Program were purchased by employees during the months January to April
1996. In May a successor plan (the 1996 Plan) was established which made
available 1,000,000 shares of BDM common stock, with a maximum of 500,000 shares
available for purchase in any 12-month period. During the offering period of May1, 1996 to October 31, 1996, the purchase price is 85% of the closing price of
BDM common stock on May 1, 1996 (the base price), or 85% of the closing price at
the end of each month, whichever is less. The base price will be reset every six
months to 85% of the closing price on the first trading day of the next offering
period. The new 1996 Plan includes a 90-day holding period during which
employees may not sell shares purchased under the 1996 Plan.
(5) Acquisition
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On February 20, 1996, the Company completed the acquisition of three
affiliated companies - CW Systems, Inc., IG Systems, Inc. and Melco Systems,
Inc. - for $18.5 million. The acquired companies specialize in providing
information technology systems and services to large commercial organizations in
various industries, as well as to various state agencies. The acquisition of
these companies has been accounted for as a purchase, and the results of their
operations have been included in the Company's consolidated statement of income
since the date of acquisition. Of the total purchase price, $8.8 million was
paid out of existing cash balances and $9.7 million was financed through the
issuance of notes payable to the previous owners. The notes are payable over two
years and bear an interest rate equal to the prevailing yield rate on twenty-six
week United States Treasury Bills, determined every six months (4.71 % as of
June 30, 1996). Interest is payable on a quarterly basis. Resulting goodwill
totaled $16 million, and will be amortized on a straight-line basis over 15
years. Other intangible assets, relating to non-compete agreements, totaled $1.4
million and will be amortized over two years.
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International Defense: Revenue from international defense business
increased 14% and 15% for the three and six month periods ended June30, 1996, compared to the same periods in 1995 due to higher revenue
earned on BDM Federal's contract with the Royal Saudi Air Force and
higher revenue on Vinnell's contract with the Royal Saudi Land Forces.
This was somewhat offset by a decrease in revenue on Vinnell's contract
with the Saudi Arabian National Guard. The real growth in the Company's
German defense business was masked by exchange rate fluctuations as the
U.S. dollar strengthened roughly 6% against the German mark in 1996
compared to 1995. Excluding the impact of changes in the exchange rate,
international defense business would have increased by 16% and 15% for
the three and six month periods ended June 30, 1996, compared to the
same periods in 1995. Certain 1995 amounts have been reclassified
between the International Defense and the Civil Government categories
to conform with the 1996 presentation.
Civil Government: The increase of 2% in civil government revenue for
the three and six month periods ended June 30, 1996, reflects growth in
Vinnell's Job Corps Center contracts and BDM Federal's work for local
school districts. This growth was offset by a decline in revenue from
BDM's environmental restoration and waste management programs for the
Department of Energy, as well as a slight decline in revenue generated
from state governments. The Federal government's decision to delay by
two years the deadline by which states must have federally certified
information systems in place to manage and track their child support
enforcement programs has contributed to a flattening of revenue growth
for BDM Technologies' state government business. The Company has
recently won two substantial state government contracts, one in
Arkansas and the other in Montana. Work on the Arkansas contract began
in the third quarter of 1996. The Company is currently providing a
broad array of information services support to the State of Montana.
The new Montana contract, which will commence in early 1997, will
expand upon the Company's current work.
Commercial: The increase of 14% and 21% in commercial revenue for the
three and six month periods ended June 30, 1996, reflects growth of
information technology work for various clients, principally generated
from the companies acquired in late February. International commercial
revenue, which is roughly half of the Company's total commercial
business, was impacted by the aforementioned fluctuations in the German
mark to U.S. dollar exchange rate. Excluding the impact of the currency
fluctuations, commercial revenue would have increased by 18% for the
three months ended June 30, 1996, compared to the same period in 1995.
Timing issues related to the installation of the Company's warehouse
automation and distribution product, MARC(TM) Systems, resulted in
slower than expected growth for the quarter in BDM Technologies'
domestic commercial business, excluding the effect of the acquisitions.
Revenue by Services Provided
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Systems and software integration revenue increased 23% and 37% for the
three and six months ended June 30, 1996, compared to the same periods
in 1995. This increase was driven by growth in BDM Federal's DEIS
contract with the Defense Information Systems Agency, as well as work
for a variety of commercial clients primarily related to the
acquisitions completed in February. The increase in computer and
technical services revenue of 14% and 8% for the three and six month
periods is a result of growth in a number of contracts including the
expansion of work for the Royal Saudi Land Forces, test and evaluation
programs, and technical support for ballistic missile defense and other
military programs. Vinnell's Job Corps contracts were a major driver of
the increase in enterprise management and operations revenue.
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Revenue by Subsidiary
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Revenue at BDM Federal grew 20% and 21% for the three and six months
ended June 30, 1996, compared to the same periods in 1995. This
increase reflects expanded work for a wide variety of clients, most
notably involving information technology services on the DEIS contract,
and also increased services and support in defense test and evaluation,
ballistic missile defense, and other military program areas. The 47%
and 44% revenue increases at BDM Technologies for the three and six
month periods ended June 30, 1996, were largely due to growth in its
commercial information technology work, primarily resulting from the
acquisitions completed in February. BDM Europe's higher revenue
reflected additional work performed for the German Ministry of Defense
and commercial clients. In local currency, BDM Europe's revenue
increased approximately 13% and 9% for the three and six month periods.
This real growth was masked by changes in the exchange rate. Finally,
Vinnell's revenue increased 21% and 16% for the three and six month
periods ended June 30, 1996. This increase was driven by its Job Corps
Center contracts and work for the Royal Saudi Land Forces, although
this growth was partially offset by a decrease in revenue for its
contract with the Saudi Arabian National Guard.
The following table sets forth selected financial data, expressed as a
percentage of revenue:
[Enlarge/Download Table]
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Sales 83.9 83.9 83.9 82.9
Selling, general and administrative 9.3 9.8 9.2 9.9
Depreciation, amortization and other 1.8 2.2 1.8 2.6
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Operating profit 5.0 4.1 5.1 4.6
Interest (income) expense, net (0.3) 0.6 (0.2) 0.7
Equity in earnings of affiliates (0.2) (0.2) (0.2) (0.2)
Minority interest 0.9 0.4 1.1 0.7
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Income before taxes 4.6 3.3 4.4 3.5
Provision for income taxes 2.0 1.5 1.9 1.7
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Net income 2.6% 1.8% 2.5% 1.8%
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COST OF SALES
Cost of sales, which includes salaries, benefits, subcontractor
expenses, materials and overhead costs, was stable as a percentage of revenue
for the second quarter of 1996 compared to the same period in 1995, reflecting a
similar mix of services and materials in the two periods. The increase in cost
of sales as a percentage of revenue for the first six months of 1996 compared to
the same period in 1995 reflects a one-time profit recognition in March 1995
from a Vinnell contract, which was applicable to services provided since the
inception of the contract in May 1994. This lowered the 1995 cost of sales
percentage.
SELLING, GENERAL AND ADMINISTRATIVE
The decrease in selling, general and administrative (SG&A) expense as a
percentage of revenue for the three and six months ended June 30, 1996, compared
to the prior year periods reflects revenue growth which has outpaced the dollar
increase in SG&A costs. The dollar increase in SG&A costs reflects the inclusion
of the companies acquired in February 1996, as well as an increase in
expenditures for marketing, product development, recruiting, and training. These
increases were partially offset by lower SG&A costs at BDM Europe.
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DEPRECIATION, AMORTIZATION AND OTHER
Depreciation, amortization and other costs decreased as a percentage of
revenue for the three months ended June 30, 1996, compared to the same period in
1995. This decrease reflects the Company's higher revenue base which has been
accompanied by relatively flat costs. Amortization expense for the second
quarter included amounts related to the acquisitions completed in 1996, offset
by a decrease from other intangibles that have become fully amortized. For the
six months ended June 30, 1996, these costs decreased as a percentage of revenue
largely due to a $1.6 million write-off of goodwill in the first quarter of 1995
related to the FACE acquisition.
INTEREST (INCOME) EXPENSE, NET The Company had net interest income of $0.8 million and $1.0 million
for the three and six months ended June 30, 1996, compared to net interest
expense of $1.4 million and $2.5 million for the same periods in 1995. This
resulted from applying $49.4 million of net proceeds in July 1995 from the
initial public stock offering and $15.3 million of net proceeds in March 1996
from the secondary stock offering to reduce outstanding borrowings.
EQUITY IN EARNINGS OF AFFILIATES
Equity in earnings of affiliates represents the Company's share of
earnings from Vinnell's unconsolidated joint ventures. These amounts have
remained fairly stable compared to the prior year periods.
MINORITY INTEREST
The minority interest share of earnings increased as a percentage of
revenue for the three and six months ended June 30, 1996, compared to the same
periods in 1995. This increase reflects improved profitability of BDM Europe and
the expansion of Vinnell's joint ventures in the Middle East. Vinnell's contract
with the Saudi Arabian National Guard was performed under a joint venture, in
which Vinnell is a 51% partner, beginning in July 1995. The results of this
operation are included in the Company's consolidated financial statements, with
the other partner's 49% ownership interest reflected as minority interest. This
contract was performed solely by Vinnell in the first half of 1995, and thus,
the Company reported no minority interest for that contract at that time. These
increases were partially offset by a reduction in minority interest from 1995 to
1996 due to a one-time profit recognition in March 1995 from a Vinnell joint
venture in Saudi Arabia.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased as a percentage of income
before income taxes for the three and six months ended June 30, 1996, over the
same periods in 1995. The effective rate decrease was related to the write-off
of $1.6 million in goodwill from the FACE acquisition in the first quarter of
1995. This write-off was not deductible for income tax purposes. Offsetting this
somewhat was an increase in the Company's statutory tax rate from 41% in 1995 to
42% in 1996, reflecting the impact of the Company's international expansion into
countries with higher income tax rates than the United States. This higher
income tax rate considers foreign tax credits which may expire prior to their
use.
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LIQUIDITY AND CAPITAL RESOURCES
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The Company's principal sources of liquidity continue to be cash from
operations, as well as available credit under the Company's $150 million
revolving credit agreement. For the six months ended June 30, 1996, the Company
had cash flow of $11 million from operating activities. This positive cash flow
was achieved despite a delay in funding for one of Vinnell's contracts in the
Middle East. This funding was approved subsequent to quarter end, and collection
is expected during the third quarter of 1996. If the cash had been received
prior to quarter end, the Company would have had cash flow from operations of
approximately $35 million for the six months ended June 30, 1996. As of June 30,1996, the Company had approximately $147 million available for borrowing under
the revolving credit agreement.
Cash flow related to investing activities primarily consists of the
investment made for the acquisition of three affiliated companies. On February20, 1996, the Company completed the acquisition of CW Systems, Inc., IG Systems,
Inc., and Melco Systems, Inc. for $18.5 million, $8.8 million of which was paid
out of existing cash balances and $9.7 million was financed through notes
payable to the previous owners. The acquired companies specialize in providing
information technology systems and services to large commercial organizations in
several industries, as well as to certain state government agencies. Goodwill
totaled $16 million, and will be amortized on a straight-line basis over 15
years. Other intangible assets, relating to non-compete agreements, totaled $1.4
million and will be amortized over two years.
Other investing activities included capital expenditures, which have
increased due to the implementation of a new enterprise reporting system (SAP)
at BDM Federal, and working capital infusions to and earnings distributions from
Vinnell's unconsolidated joint ventures.
Financing activities include the net proceeds from the secondary stock
offering of $15.3 million completed in March of this year and the reduction of
the Company's working capital facility by $25 million. In addition, the Company
continued to provide a benefit to its employees by enabling them to purchase
shares of common stock through stock option exercises and the employee stock
purchase plan. The remaining shares of stock available under the 1995 Employee
Stock Purchase Program were purchased by employees during the months January to
April 1996. In May, a successor plan (the 1996 Plan) was established which made
available 1,000,000 shares of BDM common stock, with a maximum of 500,000 shares
available for purchase in any 12-month period. During the offering period of May1, 1996 to October 31, 1996, the purchase price is 85% of the closing price of
BDM common stock on May 1, 1996, or 85% of the closing price at the end of each
month, whichever is less. The purchase price will be reset every six months to
85% of the closing price on the first trading day of the next offering period.
The new 1996 Plan includes a 90-day holding period during which employees may
not sell shares purchased under the 1996 Plan.
General
Management believes the Company has sufficient liquidity and working
capital resources necessary to conduct planned business operations , debt
service requirements, planned investments, capital expenditures, and to ensure
compliance with restrictive bank covenants for the foreseeable future.
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PART IIItem 4. Submission of Matters to a Vote of Security Holders
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At the Annual Meeting of Shareholders held on May 10, 1996,
shareholders voted on the election of nine directors for the ensuing year,
approval of the 1996 Employee Stock Purchase Plan (the 1996 Plan) and the
appointment of independent accountants for 1996. Proxies were solicited for the
meeting pursuant to Regulation 14, there was no solicitation in opposition to
the management's nominees as listed in the proxy statement and all of the
nominees were elected.
The 1996 Plan makes available 1,000,000 shares of BDM common stock,
with a maximum of 500,000 shares available for purchase in any 12-month period.
During the offering period of May 1, 1996 to October 31, 1996, the purchase
price is 85% of the closing price of BDM common stock on May 1, 1996 (the base
price), or 85% of the closing price at the end of each month, whichever is less.
The base price will be reset every six months to 85% of the closing price on the
first trading day of the next offering period. The 1996 Plan includes a 90-day
holding period during which employees may not sell shares purchased under the
1996 Plan. Shareholders cast 9,925,730 votes for and 372,027 votes against the
1996 Plan, with 11,894 votes abstained.
Shareholders cast 11,072,713 votes for and 59,047 votes against
approval of Coopers & Lybrand as the Company's independent accountants for 1996,
with 14,059 votes abstained.
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits:
11.1 Statement of Computation of Earnings Per Share
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated February 20, 1996 related
to the acquisition of three affiliated companies: CW Systems,
Inc., IG Systems, Inc., and Melco Systems, Inc.
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